QROPS, QNUPS, and SIPPs – that will be the topic of today’s article.
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The best time to consider your financial situation is when you are moving to a new country.
One of the most important aspects of a person’s life is the process of planning for retirement.
Retirement Planning – Retirement planning is a very crucial strategy where an individual sets some specific retirement goals and determining the things that they have to do for achieving those goals.
In general, the process of retirement planning includes noting the sources of income, recognizing the expenses, creating a savings plan, and handling the assets for reaching the goals.
In the United States, some of the popular investment vehicles are IRAs (Individual Retirement Accounts) and 401(k) accounts, which allow a person to save money towards their retirement while having some tax benefits.
While planning for retirement, it is also very essential for people to estimate certain aspects such as retirement expenses, liabilities, life expectancy, etc.
Pension Plan – Pension Plan is a type of retirement plan that necessitates an employer to contribute a certain amount of money towards their retirement.
Pension plans are of two major types namely ‘defined benefit plan’ and ‘defined contribution plan’.
The defined benefit plan allows an individual to have pre-determined monthly payments or a lump sum amount of money upon retiring.
On the other hand, the defined contribution plan allows you to have an investment account, with the help of which, you can invest money until retirement and use the money for your retirement.
If you are in the UK or if you are a UK resident living abroad, there are certain pension schemes known as QROPS, QNUPS, and SIPPs.
So, what exactly are these pension schemes and how do they operate? If you are thinking the same, then don’t worry because it is a common doubt that arises in the minds of most people trying to save their money towards their retirement.
Some people might already be familiar with these terms, yet they aren’t sure about which pension plan suits them best.
In this article, we will discuss these pension plans in detail, and after going through this article, you won’t be having the doubt regarding which pension plan suits your retirement goals.
QROPS (Qualified Recognised Overseas Pension Scheme):
A QROPS, which stands for “Qualified Recognised Overseas Pension Scheme” is a pension plan for people (expats) living outside of the UK or the people who wish to move abroad as a part of their retirement goals.
Why move to other countries? Well, some people have the desire to retire in other countries based on various reasons such as suitable cost of living, the standard of living, etc.
For such people, it might become hard to move the money in their pension scheme abroad, especially due to the tax complications.
With the help of QROPS, people can transfer their money existing within their UK registered pension scheme.
How? Well, the QROPS informs the HMRC (Her Majesty’s Revenue and Customs) that the specific individual is qualified and meets the necessary requirements for making a transfer of the funds within the registered pension scheme.
Usually, your employer or the pension provider is obliged to inform the HMRC when you retire. However, in order to avoid the delay of this, you should also inform HMRC regarding this matter.
If the matter is not informed to HMRC, then it would lead to a situation of overpayment or underpayment of taxes. Self-employed individuals, who are about to retire must definitely inform HMRC.
With the QROPS, you can avoid this hassle and be able to transfer your funds simply to the country in which you would like to retire.
Like said before, QROPS is beneficial to the UK expats that are already living abroad or the people who plan to leave the UK by the time they retire.
Apart from these types of individuals, people who are near their Pension Lifetime Allowance (£1,073,100 during 2021-2022) can also alleviate the taxes in the future, which are usually applicable while withdrawing the pension benefits.
People who intend to take out a QROPS must be living outside of the UK regarding tax purposes or must be planning to leave.
People who intend to move out of the UK on a permanent basis are able to benefit more from QROPS because the UK government policy allows transfers to overseas pension schemes without imposing tax penalties.
Since 2017, a tax charge of 25% is applicable on the pensions that are transferred to QROPS, with an exception made when the individual and the pension scheme exist within the EEA (European Economic Area).
It has been stated very clearly that the payments made for a period of ten years should be reported to HMRC, after the transfer of the pension.
This reporting activity is carried out by the trustees of QROPS.
Difference between QROPS and ROPS – most people might also have heard about ROPS (Recognised Overseas Pension Scheme), and such people would be wondering what the difference between QROPS and ROPS is.
Well, typically they are the same. The only difference between QROPS and ROPS is that QROPS takes up the responsibility of informing HMRC about the member payments and determines that the individual meets the qualifying criteria.
Income – For being a ROPS, the ROPS rules related to how you take your income should be the same as the rules governing the UK pensions.
The maximum lump sum money that is exempt from taxes is around 25% to 30% and is known as ‘Pension Commencement Lump Sum (PLCS)’.
This PLCS amount varies depending on the region of QROPS and the specific period for which you have been a non-UK resident.
Some jurisdictions can utilize the UK Government Actuaries Department (GAD) rate limits for determining the income they get. This usually means that you can obtain a higher income level from a QROPS contrary to a UK defined benefit scheme.
Restrictions – QROPS only deal with transfers related to UK pension schemes and all types of assets must be liquidated before they could be transferred to a QROPS.
Any individual can acquire the benefits of QROPS before they reach the age of 75 years (maximum age limit).
In general, the jurisdiction for the QROPS must have an appropriate DTA (double taxation agreement) with the QROPS member’s preferred country of residence that they’ve selected for retirement.
If not, then the individual has to meet certain conditions related to the QROPS.
Taxes are applicable on the transfers that don’t qualify for these conditions, yet the individual can avoid these tax implications if they have been a resident for five years in the country same as the QROPS.
While indulging in this, the whole Europe region is considered as a single jurisdiction.
There isn’t any inheritance tax or a death tax on the QROPS funds or UK pension funds. Nevertheless, there might be a death tax or an inheritance tax in the country in which the individual is resident.
Pros of QROPS:
- Various small pension funds can be converted into a single one while having a higher purchasing power and accessibility to better investment opportunities.
- 25% to 30% tax-free lump sum amount that can be obtained starting at an age over 55 years.
- 100% of the amount in the pension scheme is transferable to beneficiaries.
- Both UK residents and non-UK residents can utilize QROPS for planning their LTA. A transfer made to a QROPS is considered a Benefit Crystallisation Event (BCE).
As per the current rules, once the transfer of the pension funds has been done into a QROPS, they are able to grow without the necessity for the assessment of LTA limits.
- Depending on the jurisdiction and the double taxation agreement, there might be potential tax advantages with QROPS.
Cons of QROPS:
- The trustees of QROPS should report to HMRC.
- Transfer charges can be high.
- In some cases, when the funds are mis-sold or aren’t regulated in the UK, then there can be additional taxes.
QNUPS (Qualifying Non-UK Pension Scheme):
A QNUPS is mostly similar to a QROPS while having some differences.
QNUPS is the best option for people who wish to have an international pension scheme.
In some cases, QNUPS are provided to people who have a higher net worth and already utilized their maximum tax-free pension contributions in the UK.
There are restrictions regarding the residence of an individual when it comes to QNUPS, as people from anywhere can have them.
Nevertheless, the country of individual’s residence might have a different type of tax treatment, and therefore, it is better to know those details prior to opting for QNUPS.
Unlike the reporting scenario that we discussed while talking about QROPS, there is no need to report to the HMRC when you choose QNUPS.
However, QNUPS is not allowed to receive transfers from the UK registered pension schemes that are free from taxes.
Income – Income can be acquired by individuals at the age of 55 years, or it can be postponed until the age of 75 years or more.
From the year 2017, 100% of the income taken from a QNUPS or QROPS that has been taken by a UK resident is subject to taxes in the UK as per UK tax rules.
QNUPS abide by the local rules and regulations while determining income, as per the jurisdiction where the scheme is active.
The income withdrawn with the help of a QNUPS is subject to taxation on the basis of the country of residence when the income has been taken.
In most cases, QNUPS are often seen as a method for avoiding the IHT (Inheritance Tax) instead of being considered as an option for accessing income by the member and this defeats the whole purpose of setting up a QNUPS.
You can get up to 30% of the amount as a tax-free lump sum at the age of 55 years, which may not be considered a big deal.
Restrictions – an advantage with QNUPS is that assets might not have to be liquidated before they can be transferred. While thinking of it from a different perspective, this might be more of an advantage rather than a restriction.
Usually, any type of asset class can be transferred to a QNUPS, which comprises alternative investments like residential properties, antiques, expensive wine, etc.
If we think of this in a detailed manner, this might be practically difficult. Even when it is possible, the costs involved with this tend to be higher than usual and are wholly dependent on the rules of receiving QNUPS.
Funding the QNUPS must be similar to that of pension funding, and as a general principle, you can expect 20% of the annual income to be accepted.
The age restrictions for withdrawing the funds from a QNUPS are dependent on the jurisdiction of the QNUPS.
There is no death tax in the UK unless the QNUPS member is intentionally trying to reduce the value of their estate before death by transferring a considerable portion of their estate to the QNUPS.
Regarding this situation, the HMRC would check whether the transfer took place shortly before the death of the individual, and it is indeed done that way, then taxes are applicable.
Pros of QNUPS:
- Immediate shelter from IHT.
- No limits on contributions. As the HMRC is actively concentrating on offshore structures, it is a good idea to restrict the entire contributions to a certain proportion of your entire net worth (such as 50%).
- No maximum age limit for starting to invest in QNUPS, yet the actual rules may vary depending on the jurisdiction of the QNUPS.
- Unlike QROPS, there are no lifetime allowance limits on the fund size when you choose to go with QNUPS.
- 100% of the QNUPS is transferable to beneficiaries.
Cons of QNUPS:
- There are no specific details regarding the tax treatment of QNUPS in most cases.
- No UK tax relief.
- Being famous for acquiring protection against inheritance tax, it is highly recommended to be cautious and acquire the proper amount of advice while choosing to opt for QNUPS.
- In some cases, QNUPS are often sold to individuals by stating them to be exempt from pension sharing rules on divorce, which is completely misleading information.
SIPP (Self-Invested Personal Pension):
SIPP (Self-Invested Personal Pension) is a personal pension scheme, which is of the defined contribution type. SIPPs are set up in the UK and are registered with the HMRC.
Any person having UK pension assets, which are already existing, can be able to profit from the flexibility of a defined contribution pension scheme while having access to unrestricted investment opportunities.
In most cases, SIPPs are only made available to people living in the UK. Nonetheless, people from other countries or people who wish to move to the UK might also be able to get their hands on SIPPs.
People who get involved with a SIPP should report all of their taxable transactions to the HMRC with the help of a self-assessment tax return, which consists of accurate information regarding the income that is taxable in the UK.
The trustees of the SIPP are also necessitated to report some types of member payments such as when an individual takes a PCLS (Pension Commencement Lump Sum) or when they draw down their income.
Income – The income can be drawn by an individual starting at an age of 55 years or more and can be drawn from this SIPP until death.
Restrictions – Other types of pension schemes and various types of occupational schemes are easily transferred into a SIPP.
It is even possible to make cash contributions, anyhow, the tax relief is limited for the first five years of the residence period outside of the UK when the SIPP member is an expat, and at the same time, the lifetime allowance limit is also applicable.
To those who may not know, lifetime allowance is the maximum limit for the profits, which can be acquired from the UK registered pension scheme like a SIPP while not having to pay a lifetime allowance charge, which can be up to 55%.
In order to start a SIPP, an individual should be of an age under 75 years and must be a UK resident.
When there is no double taxation agreement in the country of the individual’s residence, then the income is taxed as per the UK tax rules.
A specific portion of this can be claimed as a tax credit if you are being taxed in the country of residence as well.
If the SIPP member dies before reaching the age of 75 years, the fund is to be distributed among the spouse or dependents of the member in a normal way, and this is subject to test regarding the lifetime allowance.
In case the death happens after the age of 75 years, then the taxes would be applicable as per the tax status of the beneficiary, and there won’t be a test regarding the lifetime allowance.
Pros of SIPPs:
- With the help of SIPPs, the members can invest in a wide range of underlying assets.
- Using SIPPs, members can transfer assets from other pension schemes as well.
- The costs involved with setting up a SIPP are comparatively lower than some QROPS.
- No inheritance tax upon the death of the SIPP member.
- A SIPP allows an individual to have the flexibility of having a UK pension, where the entire amount of the pension can be drawn down by the member if he/she thinks that it is necessary for them.
Even though it is possible to draw down the entire amount of pension, it is not considered to be a good idea because the whole purpose of a pension scheme is to obtain income during retirement.
Cons of SIPPs:
- Members of SIPPs are subject to taxes in the UK when there is no double taxation agreement in effect between the UK and the member’s country of residence.
- Members won’t be provided with the tax planning opportunities depending on the lifetime allowance or benefit crystallization events.
On the other hand, there are International SIPPs, which often share similar characteristics of a SIPP, yet they are particularly tailored for non-UK residents.
This means International SIPPs are a good choice for the people who live outside of the EEA region and wish to transfer their UK pensions while having access to a wide range of investment opportunities.
When provided by some offshore financial advisors, International SIPPs tend to have higher fees & charges than usual.
It is common for some people to think that “Is it really necessary to go through all these hassles just for pensions?”. Well, the answer to your question without any second thought is that “It is definitely necessary”.
As we said at the beginning of this article, retirement planning is one of the crucial aspects of life and pension plans often play a very important role in that.
However, choosing the right type of pension or choosing the right jurisdiction might not be possible for most people.
It is definitely useful to acquire the help of a financial advisor concerning this matter, but how are you going to find an efficient financial planner?
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That being said, we hope that you were able to find the information provided in this article to be useful.